1. Field of the Invention
The present invention relates, generally, to investment portfolio management and asset allocation, and more particularly, to a system, method, and computer program product for dynamic allocation of assets among a plurality of investment products and options in a cost effective manner.
2. Description of Related Art
Investment strategies typically involve asset allocation, which is the distribution of investment assets among a variety of investment opportunities in order to provide a particular balance of risk and return. For example, equities generally provide a higher potential return on investment than bonds, but at a higher risk of potential loss. Cash generally provides a fixed return on investment with no risks.
To assist investors, financial services companies generally provide asset allocation models with recommended allocation percentages among classes of investments. An Aggressive model for a young investor may include 85% stock and 15% bond investment to provide the potential for capital growth. A Balanced model for a middle-age investor may include 65% stock, 25% bond, and 10% cash investment to provide some growth potential with reduced risk. Likewise, a Conservative model for an elderly investor may include 30% stock, 55% bond, and 15% cash to provide minimal risk.
When an investor purchases an investment product, such as a variable annuity, mutual funds, and so on, the initial investment is allocated among the investment options within the product according to the specified asset allocation model. As time passes, the percentage of the investor's assets in each investment class is likely to diverge from the initial allocation. For example, after a number of “bull” years, the increase in value of an investor's equities is likely to exceed the increase in value of the investor's bonds. As a result, the percentage of the investor's assets in equities will be higher than the initial allocation, and the percentage of assets in bonds will be lower than the initial allocation.
To maintain the investor's preferred asset allocation within a product, a periodic or event-driven re-evaluation and reallocation of assets is generally performed, which is commonly referred to as “rebalancing.” In the aforementioned bull market scenario, some of the investor's equities are sold and additional bonds are purchased so as to restore the desired percentages. In a like manner, in a bear market, wherein the relative increase in value in the investor's bonds typically exceeds the increase in value in equities, a rebalancing is effected by selling some of the investor's bonds and purchasing additional equities.
The evaluation of an investor's assets is generally a continuous process, but the reallocation of resources is generally performed quarterly or whenever the degree of unbalance relative to the asset allocation model exceeds a given threshold.
In addition, the allocation percentages may be modified. For example, when the investor retires or experiences other lifestyle changes, the investor may request a different allocation of assets based on a different risk/return profile. The allocation may also be modified based on general or particular economic forecasts. For example, if a bear market is predicted, an investor may desire a larger allocation of assets in bonds or cash investments.
In many instances, a reallocation of resources generates one or more taxable events, wherein the investor is taxed on the profits made when an asset is sold. Additionally, the sale or purchase may incur fees that the financial services company charges for selling or buying equities. Other fees or costs associated with transactions include tax penalties, surrender charges, processing fees, administration fees, etc. These taxes and fees have the effect of reducing the value of the investment, and thereby the effective return-on-investment (ROI) realized.
Because each investment product may be managed and administered independently, and because different products are subject to different laws and securities regulations, the above asset allocation and rebalancing process is conventionally applied to each of the investor's products independently. For example, a person's retirement accounts (IRA, 401(K), SEP-IRA, etc.) are generally managed independent of the person's day-to-day investment accounts (brokerage accounts), and individual accounts within the same general category (retirement, brokerage) are also traditionally managed independently. Even when multiple accounts are jointly managed, the aforementioned allocation of resources is applied to each account or sub-account independently.
FIG. 1 is a representation in block diagram form of an example of such rebalancing according to the prior art in which each investment product is rebalanced independently. In this example, an investor is shown as having a variable annuity 110 and a set of mutual funds 120. Prior to rebalancing, the proportion of the stock assets amounts to seventy percent (70%) of the value of the annuity 110 and the bond assets amount to thirty percent (30%). Similarly, the mutual funds contain stock assets and bond assets, whose values amount to sixty percent (60%) and forty percent (40%) of the total mutual fund value, respectively.
A target model 150 is illustrated, which indicates that the desired ratio of stocks and bonds is fifty percent (50%) each. When this model 150 is used to rebalance the investor's assets, stocks in the variable annuity 110 are sold, and additional bonds purchased, so as to provide a rebalanced variable annuity 160 with half its value invested in stocks and half in bonds. In a like manner, the model 150 is applied to rebalance the mutual funds 120, again by selling stocks and purchasing bonds, to achieve the fifty/fifty (50/50) ratio of values between stocks and bonds.
Thus, in the conventional asset allocation among a mix of different products (in this example, a variable annuity and a set of mutual funds), each product is rebalanced independently. As a result, transaction costs may be incurred for each transaction within each investment product.
The buying and selling of assets, in most all cases, results in the investor incurring fees or expenditures that must be paid to perform the transaction. Typically, the fees are recovered from within the investment product in which the transaction occurred. For example, using the example above, the broker fees for rebalancing the mutual fund would be recovered by liquidating assets held in the mutual fund. In other instances, the fees are simply paid out of a cash account. Thus, the rebalancing of the prior art does not recover the fees in a manner that may further reduce the costs of the rebalancing by, for example, recovering the fees by liquidating assets from within a different investment product. Also, such independent rebalancing does not, and typically cannot, provide the most tax beneficial scenario for the investor since each transaction executed in connection with each product may have a different tax consequence for the investor.
Thus, notwithstanding the available asset allocation models and services for managing investment portfolios and implementing such models, there is a need for a system, method, and computer program product that provides for allocating assets among a plurality of investment products to achieve a desired allocation of assets in a cost effective manner. Further, there is a need for a system, method, and computer program product that provides such cost effective asset allocation, (1) that can manage transaction costs associated with allocating assets among a plurality of investment products by minimizing tax consequences and fees for rebalancing, (2) that can dynamically allocate assets among a plurality of investment products based on transaction costs, (3) that can identify transaction costs associated with performing rebalancing of assets among a plurality of investment products to achieve a desired asset allocation, and (4) that can manage rebalancing and recovery of transaction costs in a manner that increases the effective return-on-investment.